At GSI Wealth Management, we understand how daunting this process can be. Here’s a guide to help you navigate what divorce could mean for your pensions and how to approach it with clarity and confidence.
Why Are Pensions Important in Divorce?
Pensions are often one of the largest assets a couple owns, second only to the family home. UK law treats pensions as a marital asset, meaning they can be divided as part of the financial settlement. This applies to all types of pensions, including:
- Workplace pensions
- Personal pensions
- Defined benefit (final salary) schemes
- State pensions
Even if only one partner contributed to the pension pot, it’s likely that both partners have a claim to a share of it.
Options for Dealing with Pensions
When dividing pensions in a divorce, there are three main approaches:
Pension Sharing
A pension sharing order allows a percentage of one spouse’s pension to be transferred to the other. This creates a clean break, as the recipient receives their share as a separate pension pot in their own name.
Key Points:
- The transferred share can usually be moved into a pension scheme of the recipient’s choice.
- Both defined contribution and defined benefit schemes can be shared, though the latter can be more complex.
Pension Offsetting
Pension offsetting involves balancing the value of the pension against other assets, such as property or savings. For example, one spouse might retain their full pension, while the other receives a larger share of the marital home.
Key Points:
- This option avoids splitting the pension but may lead to an imbalance in long-term financial security.
- It’s important to seek advice to understand the trade-offs, especially when valuing defined benefit pensions.
Pension Attachment (Earmarking)
With pension attachment orders, a portion of the pension benefits is paid to the ex-spouse when the pension holder begins to draw on their pension. This includes lump sums or regular income.
Key Points:
- The recipient has no control over when or how the pension is accessed.
- If the pension holder dies before accessing their pension, the attached portion may be lost.
How Are Pensions Valued in Divorce?
Pensions are typically valued using the Cash Equivalent Transfer Value (CETV). This figure represents the amount needed to transfer the pension to another provider. However, CETVs don’t always reflect the true value of certain pensions, such as defined benefit schemes, which can provide guaranteed income.
Tip: Always seek professional advice when valuing pensions to ensure an accurate and fair settlement.
Considerations for State Pensions
The State Pension is also a factor in divorce settlements. While the basic State Pension cannot be shared, additional State Pension entitlements (e.g., the old SERPS or S2P) can be included in a financial order.
Tip: Request a State Pension forecast from the government to understand what’s available.
Steps to Take During Divorce
Gather Pension Information:
Obtain details of all pensions held by you and your spouse, including CETVs, scheme rules, and retirement ages.
Work with a Specialist:
A financial adviser with experience in divorce settlements can help you understand your options and make informed decisions.
Update Your Nominations:
Once the divorce is finalised, review and update the beneficiaries of your pensions to reflect your new circumstances.
Plan for the Future:
Divorce may leave both parties with reduced pension savings. Consider how you can rebuild your retirement plan to ensure financial security.
How GSI Wealth Management Can Help
Dividing pensions during a divorce can be complex, but you don’t have to navigate it alone. At GSI Wealth Management, we offer tailored advice to help you:
- Understand the value and implications of your pensions.
- Explore the best options for dividing pensions fairly.
- Rebuild your retirement savings post-divorce.
Divorce marks a new chapter, and with the right planning, you can face the future with confidence. Contact us today to arrange a consultation.
